In this special feature we will examine the current MSME´s Lending situation in India and we will talk about how Fintech can reduce this gap and promote the financial inclusion
Current Situation
The impact in economy caused by the rise of this pandemic has been significantly negative all around the world. According to the International Monetary Fund (2020), global economy will shrink by 3% this year making this the worst decline since the Great Depression of the 1930s.
In India, the situation is no different as according to the Indian Ministry of Statistics (2020), India's GDP growth slowed to 3.1% in the fourth quarter of this year, different from fiscal year 2019 when the Indian economy had grown by 6.1% (Onmanorama, 2020). This led to a sharp increase in unemployment, a reduction in consumer activities, a negative impact on the supply chain, a drop in fuel consumption and the collapse of the tourist industry, among other consequences.
Furthermore, the situation of micro, small and medium enterprises has been absorbing the impact of the Covid 19 pandemic, affecting millions of companies in India In order to reduce the impact of this pandemic the government announced an Rs 20.9 lakh crore package, mostly made up of subsidized credit to small businesses and farmers, whereas the reserve bank of India (RBI) has reduced the key interest rate by 115 basis points since March. However, most of the private banks are asking for more than 9% interest rate (Economic Times, 2020).
Gap in the lending space
The high interest rate demanded by private banks makes access to credit difficult for MSMEs. Moreover private banks on India still ask for too much paperwork and their process of analysis of MSME mostly rely on the balance sheet. However, private banks don´t understand that most MSME don´t have a very healthy balance sheet, which is natural given their condition. Thus, MSME´s have to seek credit from nonbank financial companies or, simply, stop working. (Economic Times, 2020).
In addition, another reason why banks shy away from lending to the MSME sector is because the fear of unwillingness to repay on the part of the borrowers and the lack of collaterals for borrowing. (Forbes India, 2020).
The solution to the gap in lending space is a crucial topic to solve due to the contribution that this sector gives to the country. Around 75 million MSMEs contribute to about a third of the GDP and 45 per cent of the manufacturing output of the country. Moreover, these companies also provide employment to more than 110 million Indians (Financial Express, 2020). However, according to the World Bank, in India, there is an estimated credit demand-supply gap of $380 billion, meaning that despite the significant contribution to the country´s economy by this sector, it´s still tough to secure access to operational capital.
Possible startup ideas to bridge the gap
In the era of digital transformation, the use of new technologies has become a must to for companies in order to adapt to the current changes in the world. Different industries have been benefited by technology, and one of these industries is the financial industry. The union between Finance and Technology has created the term Fintech, which is used to describe new tech that seeks to improve and automate the delivery and use of financial services. One of these services that Fintech can improve is lending. (KPMG,2016)
Fintech focused on lending use new technologies such as Big Data, Artificial Intelligence and data analytics. Thanks to these technologies, they don´t need to do too much paperwork because they have a more efficient process. Moreover, lending platforms are able to create more accurate borrower profiles, even in the absence of financial records or previous credit history. These Fintech are mostly focused on MSME, granting seamless access to credit and financing opportunities to this hitherto unserved sector, and give them flexibility in terms of the size of the loan and in repayment options. Therefore, a Fintech focused on lending services could be a great way to reduce the lending gap.
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